Ken Rogoff: "Policymakers Should Be Cautious Seeing Gold's Drop As A Vote Of Confidence"

In principle, holding gold is a form of insurance against war, financial Armageddon, and wholesale currency debasement. And, from the onset of the global financial crisis, the price of gold has often been portrayed as a barometer of global economic insecurity. So, does the collapse in gold prices – from a peak of $1,900 per ounce in August 2011 to under $1,250 at the beginning of July 2013 – represent a vote of confidence in the global economy?

To say that the gold market displays all of the classic features of a bubble gone bust is to oversimplify. There is no doubt that gold’s heady rise to the peak, from around $350 per ounce in July 2003, had investors drooling. The price would rise today because everyone had become convinced that it would rise even further tomorrow.

Doctors and dentists started selling stocks and buying gold coins. Demand for gold jewelry in India and China soared. Emerging-market central banks diversified out of dollars and into gold.

The case for buying gold had several strong components. Ten years ago, gold was selling at well below its long-term inflation-adjusted average, and the integration of three billion emerging-market citizens into the global economy could only mean a giant long-term boost to demand.

That element of the story, incidentally, remains valid. The global financial crisis added to gold’s allure, owing initially to fear of a second Great Depression. Later, some investors feared that governments would unleash inflation to ease the burden of soaring public debt and address persistent unemployment.

As central banks brought policy interest rates down to zero, no one cared that gold yields no interest. So it is nonsense to say that the rise in the price of gold was all a bubble. But it is also true that as the price rose, a growing number of naïve investors sought to buy in.

Lately, of course, the fundamentals have reversed somewhat, and the speculative frenzy has reversed even more. China’s economy continues to soften; India’s growth rate is down sharply from a few years ago. By contrast, despite the ill-advised fiscal sequester, the US economy appears to be healing gradually. Global interest rates have risen 100 basis points since the US Federal Reserve started suggesting – quite prematurely, in my view – that it would wind down its policy of quantitative easing.

With the Fed underscoring its strong anti-inflation bias, it is harder to argue that investors need gold as a hedge against high inflation. And, as the doctors and dentists who were buying gold coins two years ago now unload them, it is not yet clear where the downward price spiral will stop. Some are targeting the psychologically compelling $1,000 barrier.

In fact, the case for or against gold has not changed all that much since 2010, when I last wrote about it. In October of that year, the price of gold – the consummate faith-based speculative asset – was on the way up, having just hit $1,300. But the real case for holding it, then as now, was never a speculative one. Rather, gold is a hedge. If you are a high-net-worth investor, or a sovereign wealth fund, it makes perfect sense to hold a small percentage of your assets in gold as a hedge against extreme events.

Holding gold can also make sense for middle-class and poor households in countries – for example, China and India – that significantly limit access to other financial investments. For most others, gold is just another gamble that one can make. And, as with all gambles, it is not necessarily a winning one.

Unless governments firmly set the price of gold, as they did before World War I, the market for it will inevitably be risky and volatile. In a study published in January, the economists Claude Erb and Campbell Harvey consider several possible models of gold’s fundamental price, and find that gold is at best only loosely tethered to any of them. Instead, the price of gold often seems to drift far above or far below its fundamental long-term value for extended periods. (This behavior is, of course, not unlike that of many other financial assets, such as exchange rates or stock prices, though gold’s price swings may be more extreme.)

Gold bugs sometimes cite isolated historical data that suggest that gold’s long-term value has remained stable over the millennia. For example, Stephen Harmston’s oft-cited 1998 study points to anecdotal evidence that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC. Ignoring the fact that bread in Babylon was probably healthier than today’s highly refined product, the price of gold today is not so different, equal to perhaps 600 loaves of bread.

Of course, we do not have annual data for Babylonian gold prices. We can only assume, given wars and other uncertainties, that true market prices back then, like today, were quite volatile.

So the recent collapse of gold prices has not really changed the case for investing in it one way or the other. Yes, prices could easily fall below $1,000; but, then again, they might rise. Meanwhile, policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance.

I've been considering this theory of the gold short end game: a few hedge funds are seeded by the commercials (the bullion banks). They take large positions-they may or may not have other client money, likely they do. They are big enough to move the market and get the attention of all the momo chaser, piggy-back hedgies. The seed players will know when the reversal is coming--in fact they will likely trigger it when the buy back in (to redeem the "investments" of the bullion banks, of course). They other clients will get clobbered but may still make money if they are out first. The slow will get the muppet extraction. The momo-chasers will kill each other and their clients.

In the meantime, the bullion banks are already long and continuing to pick up all the forwards sales they can get out of the miners.

Where I live 2.20 to 3.30 can get a decent loaf of bread. if you're paying 4.50 it's either garlic bread ready to throw to the oven in a foil bag or some other specialty giant loaf the size of 3 normal loaves of bread for making sandwiches.

The people on the ground do because if they don't it costs them something, they've got skin in the game.

Their governments however are mostly built of the same type of douche bags that run the US and EU. All political cum dumpsters and sock puppets, might be the odd honest honest man/woman running a tight platform.

Policymakers request gold to be manipulated lower, it falls, and then they take that to be a vote of confidence? If that's their thinking, we're more fucked than I thought.

No, the gold price is an echo of Volcker: "...Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake." Volcker said that about 1973, and they're not repeating the mistake this time.

The fact that gold is manipulated lower is actually a sign of no confidence by the very central banking authorities that worked to lower it!

No, Gold is not faith based. No animal comes to gold as a godly good. It is shiny and holds up. It is somewhat scarce. That's it. If shit would hold my daily labours at a constant so that in my old age I could spend them to equivalent effect, I would stock pile shit. And would write arias about its essence, scent, usefulness, and even dietary desirableness. However as I have perused the many options to contain value and have found all (like gold miners) full of holes with liars at the entrances, I have resolved upon gold. For its durability, its scarcity, and because above all I could never see a Savoy Row suited son of the satanic order of central banking donning a tin cup hat with a tiny orb, donning a onepiece fits-all double stitched, double pleated union suit and riding a small car unfit for upright seating and taking pickax and shovel and drawing out of the god's green good earth whatever tiny nugget He so fits to bestow upon them. Mining is dirty, dangerous, difficult, demoralizing.

So much better to set up the system and rule from on high in the higher ether with suit, vestment, accolade, and printing press. Actually condescending to the true printing press has a soiling element to it and so that is off-agenda.

Fact is ruler and slaves. Set up the system to preserve that, all is well. But usury in its endgame crushes the throughput. Banker hates the constraint. Gold constrains the banker. Even paper (at apogee power) constrains the banker. Must develop new control buttons without physical constraint, to be called Derivatives. Debt must be pushed to the next stage. Inconsequent of realities, must defy the REAL.

Gold is the fallback upon the full-out rout. The terrific, nearly-killed wild-eyed almost-died rallying point after unstructured, utter, moment-before-death defeat!

The market calls, no merchandise, but the market is filled with chits, affidavits, electronic promising, transparent claims upon goods-no-longer-wanted.

Read your pink pages, watch your finanmedia, stare at the tickers. Do those numbers hold any value or meaning anymore? What is a number? When every number can be inflated or reduced at will by currency manipulation. There is no definable area by which you can make true investment in ANYTHING! Charting (when the globe has been rent), Fundamentals (when every lie has been codified), Momentum when real movement has been swept from the floor by electronic proxy.

Please. People. Wake. UP! All the sanctuary statuary is a corrupted whitened sepulchre of contemptible corruption. Nothing in Global governance or global marketplace can be TRUSTED! Every regulatory, advisory, brokerage, depository has been demonstrated to have been compromised.

And the ultimate parlour token of a bankrupted business still being circulated? US Dollar. Doesn't even burn well. Every reservoir of liberty, every container of value, every proxy by which representation is made, has been altered and diminished.

How stupid the cattle that eat stones believing them to be nourishment. THERE IS NOTHING LEFT! THERE CAN NEVER BE A RESTORATION OF THAT WHICH HAS BEEN CONSUMED!

The fact that this Potemkin artifice of living continues on is only, ONLY BECAUSE EFFUSION OF MONETARY UNITS STILL MAKE THE CATTLE DROVE TO THE FEEDING POTS.

But the Debt is far too huge. The Real Production of the earth far too scarce. And the dumbed-down vehicles (humans) which still offer up devotional offering for naught are receding from the field. THE ROUT IS ABOUT! Without Gold, there can never be a Rallying to bring about economic man. Nations are in full "strategic withdrawal"; it is only MOMENTS before the coalitions, large and small of mankind, ROUT. And then every man for himself.

Wish to Rally? Better make it Gold, and Durably, Reliably. Even then many years must pass before men will extend their trust to the monumental folly-filled extensions of this day.

inflated? Gold is easily 10% of its future value. Price is highly depressed good value discount.To call this "inflated" is like saying an "inflated price" for bread is a dime for a loaf.Just utter nonsense.

Only one way to view the drop in gold and silver- they're running a sale, bitchez!!! Buy REAL value with paper fiat that is being defaced to the tune of $85 bln a month!!! Thanks Bernank, you f'n wanker!!!!

This article is way off of anything remotely resembling gold market analysis. I suggest Rogoff spend some time talking to the Bank of England FX division who rig the London Gold Fixings, rig the whole London market supply, and who have really fucked up central bank clients 'earmarked' holdings. Then talk to the BIS traders who control the price on behalf of the BIS governors. Then talk to Dudley who oversees FRBNY intervention into the Conex..

Yeah, kind of a slow day all around today -- pre-Bernanke yawnings. Like an all-night eatery that drops a basket of fries into the hot oil every 45 minutes, just in case, we've been treated to this hour's ZH gold article.

The world is awash in fiat money. All the gold mined in human history is worth $6.4 trillion. All the gold bullion available in the world now is worth $2.7 trillion. The land value of Beijing alone is $20 trillion. The land value of Shanghai is worth another $20 trilllion at least. All the real estate in China is worth at least $200 trillion. All the real estate in China twenty years ago was worth less than $5 trillion.

Gold is very inexpensive compared to the wealth bubbles that exist in the world today

GLD Dropped around 15 tons of inventory today. You know why retailers and institutions need to be encouraged to sell GLD? To free up the gold for the buyers in India, China and Russia. Know why they want it? To back their new global reserve currency when they decide it's time to cut the cord on the USD. Think the US banks are substantially net long now because they've decided to operate as charitable institutions to help the hedge funds finally make their numbers? Not a fucking chance.

there is no reason to panic about the deflationary drop, as the central bankers are firmly in control and will save us from anything and everything. makes you wonder why the previous great empires didn't figure out this central banker money-printing trick to keep the economy going?

i can't wait to read those meeting minutes from the most recent Federal Reserve Open Committee meeting....I am sure that will tell us everything we need to know about what the great wizard behind the curtain is thinking we should do next!

hold on, this is 2013...are we really listening to CNBC tell us that we are waiting to read the minutes from a FOMC meeting from 2 weeks ago...why exactly do we need to wait to read these all knowing meeting minutes again?

I know someone who has been buying an oz of gold per week for the last 40 years.

His only regret is that he was not buying 2 oz per week.

Now in his late 60's he views the events of the world with a smirk on his face.

He explains that once you have bought gold it is hard to allow yourself to sell it when it has been paid with your own money. He tells me that cash is the most dangerous commodity, not only in terms of losing value but also in terms of being tempted to buy things. In short as he says, "you only sell gold for essentials or emergencies, but cash flows out of your pocket on all the junk you can imagine."

American workers better sit down for this one. Life for them is about to get much much tougher:

WASHINGTON (AP) -- Landmark immigration legislation passed by the Senate would remake America's workforce from the highest rungs to the lowest and bring many more immigrants into the economy, from elite technology companies to restaurant kitchens and rural fields.

Seriously though, if you can afford to be patient, the $1000/Oz is good for stacking, and its rise to 'much higher' levels might be useful for swapping PM for Fiat and then in turn into other 'valuable assets'.

In my case, gold is an insurance policy. If it rises way up and I get a windfall in fiat, I'd use the fiat to buy productive land with water. I like gold, but I like the 'yield' and a view from nice acreage even more. To me gold vs. land is a 'no brainer'. Especially if things go to pot.

yup. land to cash at closing(echo bubble losing air real fast at 4.5 percent and rising price), then 4 oz per week(LB/month) starting 7/29-check from closing should be cleared...then patience cause the fucking idiots done fucked up BIGtime...

Kito, it occurs to me that if -- as some ZH bloggers have suggested in recent days -- the US banks are happy to have gold drop to where they repo the insolvent gold mines...

the banks won't care what the price is afterwards. In fact, once could argue, once they own all that gold in the ground, they'd be happy to see its price rise sky high.

Don't know if this hypothetical scenario will 'pan out', but you gotta assume that the banking elite can afford to hire the smartest guys around - to look at and plan for every scenario (even this one), such that it ends with them on top.

I'll go with the "happy to have gold drop to where they repo the insolvent gold mines" theory...

~~~

But really... A "paper ETF", [with what?... 100x leverage?]... Who the fuck really cares where the price goes to [or retreats to]... That's the BEAUTY of playing PAPER games with asset prices that YOU ALONE are allowed to set the market on because your fucking TRIBE prints you the money to do it out of thin air...

When you wrap your dome around THAT concept... kito... Instead of being a 2 bit water carrier [because you don't want it to be true]... Things will become clearer...

Dr. Paul Craig Roberts, former Asst. Treasury Secretary under Reagan, did an excellent interview with USA Watchdog within which he discusses the implications of the new trade deals being arranged between the U.S. and Europe, as well as various countries in Asia.

The short of it is that if the deals are signed, this likely prevents a collapse for some time because of the need for these countries to align their policies in support of the dollar.Barry Sotoro & Co. could print to the moon and back.

When asked about the impact of the price of gold, he damn near throws up his hands.

@divine wind..............not really sure how this supports the dollar..............trade tariffs are low already......americans might pay lower amounts for olive oil and audis, but thats just more of the same broken model.........consumption.....consumption.......consumption....not exactly what is needed to fix the economy..........................if anything, the trade deal seems to benefit american ag in opening up more exports to europe should the trade agreement lower europes standards for quality ..........more exports for the u.s. means more dollars flowing back to the u.s., which i dont thing the bernank wants........without a large trade deficit, inflation would kick in rather quickly.....the bernank needs dollars leaving, not coming.......so how exactly is this going to help the dollar????

i dont see roberts point in this...perhaps you can shed some light..................TYLER WHERE IS YOUR ANALYSIS???????!?!?!?!?!?

Exactly pods.....which is why I see this Atlantic trade agreement more for the benefit of greedy big ag who get to export their gmo laden garbage rather than for the benefit of the dollar.....btw....this seems so bad for Europe....

Your ideas on THIS ONE are stupid... [which MEANS ~ Your comments are 100% dependent on a US DOLLAR hedgemony ~ which is a 'paper ponzi' controlled by JEWS]... Which, I suppose, MAKES you a genius... Until it doesn't...

Jews Jews Jews.....blah...blah...blah...and what does this have to do with your nonsensical comment about having two names under the same person merely because I responded to divinewind??? Another grand conspiracy theory? Do tell...because your Jew shtick is getting fucking trite already....

Hey, hold on a second, wasn't the whole cheesepope thing because you weren't allowed to spell due, out loud. You and Kito are headed for the naughty corner if you don't watch it. Oh, I have a joke: What's the difference between a cheesepope and father christmas? Oh, bugger it, I can't be bothered waiting for a reply. Father christmas goes down the chimney.

It is acknowledged that this would do little more than to enable the U.S. to continue to bump along the bottom and delay the effects of running trillion dollar deficits.

Additionally, as Roberts points out in a related article on his website:

"The deal is designed to draw Europe away from trade with Russia, just as the Trans-Pacific Partnership is designed to draw Asian countries away from China and fold them into US-structured relationships.

These deals have little to do with free trade and everything to do with US hegemony.

These “free trade” deals will commit the European and Asian “partners” to support the dollar. Indeed, it is possible that the dollar will supplant the euro and Asian currencies and become the monetary unit of the “partners.” In this way Washington can institutionalize the dollar and protect it from the consequences of the printing press that is being used to boost the solvency of banks too big to fail and to finance never-ending federal budget deficits. "

I respect Roberts, and certainly wouldn't rule the possibility that the balls stay in the air longer than what might reasonably be expected. However, there are, in my view, two reasons why the next crisis is likely to occur sooner rather than later:

Too much interconnectivity, complexity, and suppressed volatility for there not to be a black swan event that triggers a cascade of crises leading to the big event.

Those attempting to control the system have already dropped a ball or two (i.e. they have already begun to lose control)

This morning I had a conversation about SHTF with a baby boomer college. He sees the probable future course of this country and he was with me except for Gold. He acknowledges that ponzi abounds and nothing can be trusted in Bonds and Stocks. we plan on continuing the conversation over drinks.

It just so happens my wife is from Venezuela and a Gold ounce arrived in the mail. Somewhat embarrassed I acknowledged buying more gold. She looked at me funny and said" Are you crazy...Gold is okay, just don't buy stocks or bonds, that's crazy." She can't cook, but I love her to death.

Gold and Silver: Sometimes it's the most obvious truths that escape us.

She is a great gal. Unfortunately, when you really think what the high price of Gold / Silver portends to our world view you have to really start planning for something very alien to our current reality. That is the difficult hurdle for both my wife and I. I might be a step or two ahead of her and a step or two behind the curve, but the depth of changes that will most likely occur are very hard to digest.

Well, the marriage between a Rothschild and a Jagoff had to end badly... witness this insipid moron, Rogoff. No mention of manipulation... With the CFTC and the asslick Gensler totally corrupt... the boyz can take the price where ever they damn well please. The COMEX and LBMA are also totally corrupt. Why play the other guys game?

I thought the Rogoff article was good, but too brief. I agree that there is no recovery, and that gold is a good storehouse of value. Wasn't that the point?

I disagree that the sequester was a bad idea because I think artificial stimulus was a bad idea from the beginning. Yes, people are dumb enough to think that paper money is safe even though the Fed prints $1 trillion a year to support the nanny state. But, in the long run, the nanny state will screw every dependant and I'd rather have real value - gold and land and booze and pot to get by.

I disagree. Most people buy gold mainly because they hope it will appreciate, and only secondarily as a hedge.

The current outlook for gold is not nearly as strong as it was in 2010, when China, India and all the EMs that really drive the gold price were inflating. China is looking shakey and India is sliding and not near bottom. The dollar gold price mainly follows EM incomes converted into dollars. If there's any one thing that caused the gold bear market, it was the collapse of the rupee.

In 2010 gold was a no brainer strong buy. Now it's a decent long term bet but with a high risk of near term loss.

What a bunch of naive, simplistic, America-is-facing-tough-times-but-we're-trying-hard-and-things-will-get-better bullshit. The problem, of course, is that people like Ken Rogoff BELIEVE IN THE SYSTEM. If that's your starting point, you're already lost....

From Mike Shedlock blog: For further discussion, here's a recap of the Fed Uncertainty Principle written April 3, 2008 before the Bernanke Fed started slashing rates in the Global Financial Crisis.

Fed Uncertainty Principle:The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One:The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three:Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four:The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Rather than wasting time and energy in foolish attempts to divine what is impossible to accurately predict, I propose getting rid of the Fed and all the wonkish analysis, then stepping back, doing nothing, and let the free market economy work as it should.